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SUBPRIME LENDING 

borrowers from the most egregious practices in the mortgage market, including bet-
ter disclosure, improved financial literacy, strengthened enforcement, and new leg-
islative protections. However, the report also recognized the downside of restricting
the lending practices that offered many borrowers with less-than-prime credit a
chance at homeownership. It was a dilemma. Gary Gensler, who worked on the re-
port as a senior Treasury official and is currently the chairman of the Commodity Fu-
tures Trading Commission, told the FCIC that the report’s recommendations “lasted
on Capitol Hill a very short time. . . . There wasn’t much appetite or mood to take
these recommendations.” 
But problems persisted, and others would take up the cause. Through the early
years of the new decade, “the really poorly underwritten loans, the payment shock
loans” continued to proliferate outside the traditional banking sector, said FDIC
Chairman Sheila Bair, who served at Treasury as the assistant secretary for financial
institutions from  to . In testimony to the Commission, she observed that
these poor-quality loans pulled market share from traditional banks and “created
negative competitive pressure for the banks and thrifts to start following suit.” She
added,

[Subprime lending] was started and the lion’s share of it occurred in the
nonbank sector, but it clearly created competitive pressures on
banks. . . . I think nipping this in the bud in  and  with some
strong consumer rules applying across the board that just simply said
you’ve got to document a customer’s income to make sure they can re-
pay the loan, you’ve got to make sure the income is sufficient to pay the
loans when the interest rate resets, just simple rules like that . . . could
have done a lot to stop this. 

After Bair was nominated to her position at Treasury, and when she was making
the rounds on Capitol Hill, Senator Paul Sarbanes, chairman of the Committee on
Banking, Housing, and Urban Affairs, told her about lending problems in Baltimore,
where foreclosures were on the rise. He asked Bair to read the HUD-Treasury report
on predatory lending, and she became interested in the issue. Sarbanes introduced
legislation to remedy the problem, but it faced significant resistance from the mort-
gage industry and within Congress, Bair told the Commission. Bair decided to try to
get the industry to adopt a set of “best practices” that would include a voluntary ban
on mortgages that strip borrowers of their equity, and would offer borrowers the op-
portunity to avoid prepayment penalties by agreeing instead to pay a higher interest
rate. She reached out to Edward Gramlich, a governor at the Fed who shared her con-
cerns, to enlist his help in getting companies to abide by these rules. Bair said that
Gramlich didn’t talk out of school but made it clear to her that the Fed avenue wasn’t

going to happen. Similarly, Sandra Braunstein, the director of the Division of Con-
sumer and Community Affairs at the Fed, said that Gramlich told the staff that
Greenspan was not interested in increased regulation. 
When Bair and Gramlich approached a number of lenders about the voluntary